Crude Oil Price Analysis for January 3, 2018

Crude Oil earlier clocked a new trend high at 60.74, which is the highest level traded since June 2015, but was unable to hold on to gains. This is the first time since 2014 that prices have opened a new year above 60.00. The widespread anti-government protests in Iran, which have run into a 4th day, have added to the bullish underlying narrative in crude markets, offsetting news that the 450k barrels per day Forties pipeline in the North Sea reopened on Saturday after an unplanned shutdown. A reduction in global crude inventories, along with the OPEC-led supply restriction program, which will extend through to the end of 2018, have been underpinning crude prices, along with expectations for growing global demand. Market participants will be keeping a close eye on U.S production levels, which are set to hit record highs of over 10 million barrels a day over the coming month or two.

Technicals

Crude oil prices edged lower after hitting a 2.5-year high, and is poised to test target resistance near the May 2015 highs at 62.58.  Support on crude oil prices is seen near the 10-day moving average at 58.97.  Prices have formed a bull flag pattern which is a pause that refreshes higher and then broken out, which is a recipe for higher prices. Momentum is positive as the MACD (moving average convergence divergence) histogram prints in the black with an upward sloping trajectory which points to higher prices for crude oil. The relative strength index (RSI) which is a momentum oscillator that measures overbought and oversold level is bumping up against the 70 overbought trigger level which could foreshadow a correction.

Backwardation is Strong

The term-structure of the crude oil market is in heavy backwardation. The June versus red-June spread shows that prices in June of 2018 are more than $3.5 dollar higher than June 2019.  This shows that there is strong demand for crude oil presently, driven by refiners who are operating at near record levels.  The year over year increase in refining operation is up 4%, as strong demand for products domestically and internationally is keeping refiners busy.

Forties is Back Online

The Forties Pipeline in the North Sea is expected to return to normal flow rates of some 450,000 barrels per day around new year, the operator of the pipeline, Ineos, reported in its latest media update on the progress of the repairs. Ineos shut the pipeline down on December 11 after discovering a hairline crack in the pipe just south of Aberdeen. Following the announcement of the controlled shutdown, Brent prices spiked not only because the pipeline carries some 450,000 barrels per day, but also because Ineos said that the repair would take “weeks rather than days.”

Not only is the Forties pipeline a key transit route for North Sea oil, the Forties crude blend is the largest component of the Brent-Forties-Oseberg-Ekofisk-Troll (BFOE) complex, which is the basis for the Brent futures contract.

U.S. Production is Growing

U.S. shale production is expected to grow over the next few years as the companies that survived the worst of the downturn showed resilience in the face of the lower-for-longer oil prices. But three years of low oil prices also led to the global oil industry slashing investments in conventional oil exploration, and deferring or revisiting development plans.

This has led to the lowest ever volumes of oil discoveries in 2017, Rystad Energy said last week. While the low level of discoveries is not an immediate threat to global oil supply, it could become such ten years down the road.